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EX-31.1 - EX.31.1 - RULE 13A-14(A)/15D-14(A) CEO CERT - NextWave Wireless Inc.mm08-0910_10qe3101.htm
EX-32.1 - EX.32.2 - SECTION 1350 CERT OF CFO - NextWave Wireless Inc.mm08-0910_10qe3202.htm
EX-32.1 - EX.32.1 - SECTION 1350 CERT OF CEO - NextWave Wireless Inc.mm08-0910_10qe3201.htm
EX-31.2 - EX.31.2 - RULE 13A-14(A)/15D-14(A) CFO CERT - NextWave Wireless Inc.mm08-0910_10qe3102.htm
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended July 3, 2010
   
 
OR
   
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from to

Commission file number 000-51958

NEXTWAVE WIRELESS INC.
(Exact name of registrant as specified in its charter)

Delaware
20-5361360
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
   
12264 El Camino Real, Suite 305, San Diego, California
92130
(Address of principal executive offices)
(Zip Code)

(858) 480-3100
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £
Accelerated filer £
Non-accelerated filer £
Smaller reporting company R
 
(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes R No £

As of August 2, 2010, there were 22,396,411 shares of the Registrant’s common stock outstanding.


 
1

 

TABLE OF CONTENTS

PART I. Financial Information
 
Item 1.
Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets
 
 
Condensed Consolidated Statements of Operations
 
 
Condensed Consolidated Statements of Cash Flows
 
 
Notes to Condensed Consolidated Financial Statements
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Reserved
 
Item 4.
Controls and Procedures
 
PART II. Other Information
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Removed and Reserved
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
Signatures
   
Index to Exhibits
 



 
2

 

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NEXTWAVE WIRELESS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
(unaudited)
   
July 3,
2010
   
January 2,
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 31,576     $ 15,056  
Restricted cash and marketable securities
    3,634       24,088  
Wireless spectrum licenses held for sale
    59,048       62,868  
Prepaid expenses and other current assets
    551       2,546  
Current assets of discontinued operations
    68,285       23,678  
Total current assets
    163,094       128,236  
Wireless spectrum licenses, net – continuing operations
    405,325       409,156  
Property and equipment, net
    3,821       213  
Other assets, including assets measured at fair value of $0 and $1,227 at July 3, 2010 and January 2, 2010, respectively
    5,126       6,959  
Other noncurrent assets of discontinued operations
          58,226  
Total assets
  $ 577,366     $ 602,790  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities:
               
Accounts payable
  $ 1,307     $ 1,229  
Accrued expenses
    7,891       8,196  
Current portion of long-term obligations
    62,134       86,154  
Other current liabilities
    136       10,283  
Current liabilities of discontinued operations
    28,117       30,371  
Total current liabilities
    99,585       136,233  
Deferred income tax liabilities
    88,867       88,958  
Long-term obligations, net of current portion
    729,282       641,950  
Other liabilities
    5,674       9,577  
Long-term liabilities and deferred credits of discontinued operations
          1,729  
Commitments and contingencies
               
Stockholders’ deficit:
               
Preferred stock, $0.001 par value; 25,000 shares authorized; 355 shares designated as Series A Senior Convertible Preferred Stock; no other shares issued or outstanding
           
Common stock, $0.007 par value; 57,143 shares authorized; 22,494 and 22,434 shares issued and outstanding at July 3, 2010 and January 2, 2010, respectively
    157       157  
Additional paid-in-capital
    886,521       884,321  
Accumulated other comprehensive income
    17,823       14,437  
Accumulated deficit
    (1,265,052 )     (1,190,520 )
Stockholders’ deficit attributed to NextWave
    (360,551 )     (291,605 )
Noncontrolling interest in subsidiary
    14,509       15,948  
Total stockholders’ deficit
    (346,042 )     (275,657 )
Total liabilities and stockholders’ deficit
  $ 577,366     $ 602,790  




The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 

NEXTWAVE WIRELESS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
   
Three Months Ended
   
Six Months Ended
 
   
July 3,
2010
   
June 27,
2009
   
July 3,
2010
   
June 27,
2009
 
Operating expenses:
                       
General and administrative
  $ 8,023     $ 11,575     $ 13,859     $ 20,659  
Sales and marketing
          80             207  
Asset impairment charges
          83             9,562  
Restructuring charges (credits)
    22       (717 )     15       2,038  
Total operating expenses
    8,045       11,021       13,874       32,466  
Gain (loss) on sales of wireless spectrum licenses
    (152 )     668       12       671  
Loss from operations
    (8,197 )     (10,353 )     (13,862 )     (31,795 )
Other income (expense):
                               
Interest income
    247       82       514       304  
Interest expense
    (54,175 )     (39,123 )     (98,263 )     (75,863 )
Gain on extinguishment of debt
                37,988        
Other income (expense), net
    (1,151 )     152       9,381       (1,349 )
Total other income (expense), net
    (55,079 )     (38,889 )     (50,380 )     (76,908 )
Loss from continuing operations before income taxes
    (63,276 )     (49,242 )     (64,242 )     (108,703 )
Income tax benefit (provision)
          1             (30 )
Net loss from continuing operations
    (63,276 )     (49,241 )     (64,242 )     (108,733 )
Loss from discontinued operations, net of gains (losses) on divestiture of discontinued operations of $(4,617), $(2), $(4,616) and $51, income tax provisions of $10, $76, $107 and $232,  and net loss attributed to noncontrolling interest of $1,671, $0, $1,237 and $0, respectively
    (7,906 )     (6,246 )     (10,290 )     (28,933 )
Net loss attributed to NextWave
  $ (71,182 )   $ (55,487 )   $ (74,532 )   $ (137,666 )
Amounts attributed to NextWave common shares:
                               
Loss from continuing operations, net of tax
  $ (63,276 )   $ (49,241 )   $ (64,242 )   $ (108,733 )
Loss from discontinued operations, net of tax
    (7,906 )     (6,246 )     (10,290 )     (28,933 )
Net loss attributed to NextWave common shares
  $ (71,182 )   $ (55,487 )   $ (74,532 )   $ (137,666 )
Net loss per share attributed to NextWave common shares – basic and diluted
                         
Continuing operations
  $ (2.60 )   $ (2.21 )   $ (2.65 )   $ (5.05 )
Discontinued operations
    (0.33 )     (0.28 )     (0.42 )     (1.35 )
Net loss
  $ (2.93 )   $ (2.49 )   $ (3.07 )   $ (6.40 )
Weighted average shares used in per share calculation
    24,279       22,288       24,256       21,503  

 





The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4

 

NEXTWAVE WIRELESS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
   
Six Months Ended
 
   
July 3,
2010
   
June 27,
2009
 
OPERATING ACTIVITIES
           
Net loss
  $ (75,769 )   $ (137,666 )
Loss from discontinued operations, net of tax
    (11,527 )     (28,933 )
Loss from continuing operations
    (64,242 )     (108,733 )
Adjustments to reconcile loss from continuing operations to net cash used in operating activities of continuing operations:
               
Amortization of intangible assets
    3,838       3,838  
Depreciation
    160       116  
Non-cash share-based compensation
    611       1,218  
Non-cash interest expense
    97,981       70,867  
Gain on extinguishment of debt
    (37,988 )      
Asset impairment charges
          9,563  
Other non-cash adjustments
    917       (501 )
Changes in operating assets and liabilities:
               
Prepaid expenses and other current assets
    718       303  
Other assets
    (226 )     (362 )
Accounts payable and accrued liabilities
    (3,980 )     (4,573 )
Other current liabilities
    (8,162 )     (516 )
Net cash used in operating activities of continuing operations
    (10,373 )     (29,451 )
INVESTING ACTIVITIES
               
 Proceeds from the sale of ARS securities
    24,023        
 Payments received on notes receivable
    7,100        
 Proceeds from the sale of wireless spectrum licenses
    683       5,475  
Purchase of property and equipment
    (3,803 )      
Other, net
    1,054       231  
Net cash provided by investing activities of continuing operations
    29,057       5,706  
FINANCING ACTIVITIES
               
Proceeds from long-term obligations
    25,000       (6,731 )
Payments on long-term obligations
    (25,256 )     (6,731 )
Proceeds from the sale of common shares
    141        
Net cash used in financing activities of continuing operations
    (115 )     (6,731 )
Cash provided (used) by discontinued operations:
               
Net cash provided by (used in) operating activities of discontinued operations
    3,330       (13,654 )
Net cash provided by (used in) investing activities of discontinued operations
    (394 )     159  
Net cash used in financing activities of discontinued operations
    (7,100 )     (39 )
Net cash provided (used) by discontinued operations
    (4,164 )     (13,534 )
Effect of foreign currency exchange rate changes on cash
    (1,073 )     270  
Net increase (decrease) in cash and cash equivalents
    13,332       (43,740 )
Cash and cash equivalents, beginning of period
    20,512       61,517  
Cash and cash equivalents, end of period
    33,844       17,777  
Less cash and cash equivalents of discontinued operations, end of period
    (2,268 )     (9,908 )
Cash and cash equivalents of continuing operations, end of period
  $ 31,576     $ 7,869  
NONCASH FINANCING ACTIVITIES
               
Senior, Second and Third Lien Notes issued to noteholders in exchange for debt modification fees
  $ 21,249     $  
Fair value of warrants issued in connection with the Asset Sale Condition of the Second Lien Notes
  $     $ 1,719  


 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
5

 

NEXTWAVE WIRELESS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.  
Basis of Presentation and Significant Accounting Policies
 
Financial Statement Preparation
 
The condensed consolidated financial statements of NextWave Wireless Inc. (together with its subsidiaries, “NextWave”, “we”, “our” or “us”) are unaudited. We have prepared the condensed consolidated financial statements in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”), and therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the accompanying condensed consolidated financial statements for the periods presented reflect all adjustments necessary to fairly state our financial position, results of operations and cash flows, including adjustments related to asset impairment write-offs and restructuring-related charges. These condensed consolidated financial statements should be read in conjunction with our audited financial statements for the year ended January 2, 2010, from which the balance sheet data was derived, included in our Annual Report on Form 10-K filed with the SEC on April 2, 2010.
 
Basis of Presentation and Liquidity
 
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of our liabilities in the normal course of business. We generated net losses attributable to NextWave of $74.5 million and $137.7 million for the six months ended July 3, 2010 and June 27, 2009, respectively, and have an accumulated deficit of $1.3 billion at July 3, 2010. Our net loss from continuing operations of $64.2 million for the six months ended July 3, 2010 includes a $38.0 million noncash gain on extinguishment of debt resulting from the debt modification of our Third Lien Subordinated Secured Convertible Notes due 2011 (the “Third Lien Notes”) in March 2010, as described below, which was treated as an extinguishment of debt for accounting purposes.   Without this gain, we would have reported a loss from continuing operations of $102.2 million for the six months ended July 3, 2010.  We used cash from operating activities of our continuing operations of $10.4 million and $29.5 million during the six months ended July 3, 2010 and June 27, 2009, respectively. Our total unrestricted cash and cash equivalents held by continuing operations at July 3, 2010 totaled $31.6 million. We had net working capital of $63.5 million at July 3, 2010.
 
We have funded our operations, business combinations, strategic investments and wireless spectrum license acquisitions primarily with the $550.0 million in cash received in our initial capitalization in April 2005, the net proceeds of $295.0 million from our issuance of our Senior Secured Notes (the “Senior Notes”) in 2006 and 2010, the net proceeds of $351.1 million from our issuance of Series A Senior Convertible Preferred Stock (the “Series A Preferred Stock”) in March 2007, which, in October 2008, we exchanged for Third Lien Notes in the aggregate principal amount of $478.3 million, and the net proceeds of $101.0 million from our issuance of Senior Subordinated Secured Second Lien Notes (the “Second Lien Notes”) in October 2008 and July 2009. We did not receive any proceeds from the issuance of the Third Lien Notes.
 
In an effort to reduce our future working capital requirements and in order to comply with the terms of our Senior Notes, Second Lien Notes and Third Lien Notes, in the second half of 2008, our Board of Directors approved the implementation of a global restructuring initiative, pursuant to which we have divested, either through sale, dissolution or closure, our operating business segments. The actions completed as a result of our global restructuring initiative are described in more detail below under the heading “Discontinued Operations”.
 
Effective as of March 16, 2010, we entered into an Amendment and Limited Waiver (the “Amendment and Waiver”) to the agreements governing our Senior Notes, Second Lien Notes and Third Lien Notes.  Pursuant to the Amendment and Waiver, the maturity date of our Senior Notes was extended from July 17, 2010 to July 17, 2011, with an additional extension to October 17, 2011 if certain conditions are met, including the pendency of asset sales that would yield net proceeds sufficient to repay all then-outstanding Senior Notes.  In addition, the maturity date of our Second Lien Notes was extended from
 
 
6

 
 
December 31, 2010 to November 30, 2011.  As a result of the Amendment and Waiver, the interest payable on our Senior Notes and Second Lien Notes was increased to a rate of 15% per annum and the interest payable on our Third Lien Notes was increased to a rate of 12% per annum initially, increasing 1% per annum on each of December 31, 2010, March 30, 2011, June 30, 2011 and September 30, 2011 to a maximum of 16%.  After giving effect to the Amendment and Waiver, all Notes will receive only payment-in-kind interest for the full term of such Notes, unless we elect to pay cash interest, and the redemption premium on the Notes was eliminated.  The Amendment and Waiver reduced the requirement to maintain a minimum cash balance from $5.0 million to $1.0 million and, after payment in full of certain designated Senior Notes with an aggregate principal amount of $56.5 million at July 3, 2010 and the Senior Incremental Notes (as defined below) with an aggregate principal amount of $25.5 million at July 3, 2010, permits us to retain up to $12.5 million of asset sale proceeds for general working capital purposes and permitted investments. As consideration for the Amendment and Waiver, we paid an amendment fee to each Holder through the issuance of additional Notes under the applicable Note Agreements in an amount equal to 2.5% of the outstanding principal and accrued and unpaid interest on such Holder’s existing Notes.
 
As permitted by the Amendment and Waiver, in order to fund our working capital needs and permitted investments pending completion of asset sales, we issued $20.0 million and $5.0 million in additional Senior Notes (the “Senior Incremental Notes”) to Avenue Capital Management II, L.P., acting on behalf of its managed investment funds signatory thereto (“Avenue”), and Solus Core Opportunities Master Fund Ltd and its affiliates and co-investors (“Solus”), respectively.  As with the other Senior Notes, amounts outstanding under the Senior Incremental Notes bear interest at a rate of 15% per annum, payable in-kind unless we elect to pay cash, and are secured by a first lien on the same assets securing our Senior Notes, on a pari passu basis.   No commitment fee or structuring fee was payable in connection with the issuance of the Senior Incremental Notes.
 
The Amendment and Waiver to our Third Lien Notes, which increased the interest rate payable on our Third Lien Notes, was determined to have been accomplished with debt instruments that are substantially different, in accordance with generally accepted accounting principles, resulting in an effective extinguishment of the existing Third Lien Notes and a new issue of Third Lien Notes as of the amendment date for accounting purposes.  The new issue of Third Lien Notes was recorded at fair value using a discount rate of 40%, and that amount was used to determine the net debt extinguishment gain of $38.0 million recognized during the six months ended July 3, 2010, in other income in the accompanying consolidated statements of operations. The net gain of $38.0 million was determined as the difference between the remaining unamortized discount under the extinguished Third Lien Notes of $123.1 million and the new discount of $164.8 million, plus $9.6 million of embedded derivative liabilities that were eliminated at the date of the extinguishment, partially offset by $13.3 million in fee notes issued to the Third Lien noteholders.  The new discount of $164.8 million is amortized using the effective interest rate method over the remaining term of the Third Lien Notes due December 2011 which will significantly increase our interest expense for financial reporting purposes.
 
In 2010, we have capital expenditure needs associated with certain build-out or substantial service requirements which apply to our licensed wireless spectrum, which generally must be satisfied as a condition of license renewal. The substantial service build-out deadline for our domestic Wireless Communication Services (“WCS”) spectrum was July 21, 2010 under the Federal Communication Commission (“FCC”) rules in existence at that time.  However, the FCC adopted new rules on May 20, 2010, that, when effective, (anticipated to be September 1, 2010) purported to replace the July 21, 2010 substantial service requirements with new requirements that must be met 42 and 72 months after the date that new WCS technical and service rules become effective.  We filed substantial service showings with the FCC on July 20, 2010 for all of our WCS licenses under the rules then in effect.  While we believe we have made the capital expenditures required to complete the applicable WCS build-out requirements, we may be required to make additional capital expenditures to comply with the new rules if the FCC does not accept our substantial service showings under the rules in effect on July 20, 2010.  The substantial service deadline for Educational Broadband Service and Broadband Radio Service (“EBS/BRS”) spectrum is May 1, 2011; however, most of our EBS leases require us to complete most build out activities in 2010, in advance of the FCC’s substantial service deadline.  Failure to meet our service requirements could result in  forfeiture of the applicable licenses.
 
 
 
7

 
 
 
We believe that the completion of our asset divestiture and cost reduction actions, our current cash and cash equivalents, our ability to pay payment-in-kind interest in lieu of cash interest to the holders of our secured notes, and access to $12.5 million of future asset sales proceeds as permitted by our secured note agreements will allow us to meet our estimated operational cash requirements at least through June 2011.  Should we be unable to achieve the revenues and/or cash flows through June 2011 as contemplated in our current operating plan, or if we were to incur significant unanticipated expenditures in excess of proceeds available to us through asset sales, we will seek to identify additional capital resources including the use of our remaining $10.0 million of incremental Second Lien Notes debt basket, and will implement certain additional actions to reduce our working capital requirements including staff reductions.
 
Reverse Stock Split
 
Effective June 21, 2010 we amended our Amended and Restated Certificate of Incorporation to effect a 1-for-7 reverse stock split.  The primary purpose of the reverse stock split was to raise the per share trading price of our common stock to seek to maintain the listing of our common stock on The NASDAQ Stock Market.  At the effective time of the reverse stock split, every seven shares of our pre-split common stock, with a par value $0.001 per share, was automatically converted into one share of post-split common stock, with a par value $0.007 share.  The number of authorized shares of our common stock was reduced accordingly by a ratio of 1-for-7 from 400 million to 57.1 million shares.  Outstanding stock incentive awards and shares available for future grants were also adjusted to give effect to the reverse split.  In settlement of fractional shares resulting from the reverse split, we  made a cash payment based on the average closing sales price of our common stock for the ten trading days immediately preceding the effective time.
 
Delisting of Our Common Stock
 
On October 7, 2008, we received a Staff Deficiency Letter from NASDAQ notifying us that we were not in compliance with NASDAQ’s Marketplace Rule 5450(a)(1) (the “Rule”) because the closing bid price for our common stock had, for the preceding 30 consecutive business days, closed below the minimum $1.00 per share requirement for continued listing. In accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), we were provided a period of 180 calendar days to regain compliance. On October 16, 2008, NASDAQ announced that they had suspended the enforcement of the Rule until January 19, 2009, and as a result, the period during which we had to regain compliance was extended to July 10, 2009. On July 15, 2009, NASDAQ announced that they had determined to continue the temporary suspension of the Rule until July 31, 2009, and as a result, the period during which we had to regain compliance was extended to January 21, 2010. On January 22, 2010, we received a Staff Determination letter from the Listing Qualifications Department of NASDAQ indicating that our common stock would be subject to delisting from The NASDAQ Global Market because of non-compliance with the Rule, unless we requested a hearing before a NASDAQ Listing Qualifications Panel (the “Panel”) by the close of business on January 29, 2010.  We requested a hearing on the matter and such hearing occurred on February 25, 2010.  On March 26, 2010, the Panel granted our request for continued listing, subject to the conditions that on or before May 1, 2010, we must inform the Panel that we have filed a proxy statement for our annual meeting of stockholders including a vote on a reverse stock split in a ratio sufficient to meet the $1.00 per share requirement for continued listing and on or before July 21, 2010, we must have evidenced a closing bid price of $1.00 or more for a minimum of ten prior consecutive trading days.  On July 21, 2010, the Panel notified us that our stock had not met this requirement and that our common stock would be delisted from the NASDAQ effective July 23, 2010.  Pink OTC Markets, Inc. informed us that our stock was eligible to begin trading immediately on the OTCQB as of the open of trading on July 23, 2010 and the stock currently is trading on that market under the symbol WAVE.
 
Discontinued Operations and Segment Reporting
 
On July 30, 2010, we signed a definitive agreement for the sale of our remaining 65% stock ownership in our PacketVideo Corporation (“PacketVideo”) subsidiary to NTT DOCOMO, Inc. (DOCOMO) and continued to pursue wireless spectrum license sales, the net proceeds of which we will retain $12.5 million for general working capital purposes and permitted investments and the remainder of
 
 
 
8

 
which will be used to reduce our outstanding indebtedness, thereby reducing interest accruals payable in future years. We are also actively pursuing the sale or wind-down of various remaining portions of our spectrum operations in South America and Europe.
 
We have classified the businesses comprising our Multimedia and Semiconductor segments as well as our WiMAX Telecom, Inquam and South American businesses, which were previously reported in our Strategic Initiatives segment, as discontinued operations for all periods presented.
 
Our continuing operations are comprised of our strategic initiatives segment, which manages our portfolio of licensed wireless spectrum assets.  Since we now operate in only one business, we no longer provide segment reporting.
 
The carrying amounts of the assets and liabilities of our discontinued operations are as follows:
 
(in thousands)
 
July 3,
2010
   
January 2,
2010
 
 
Cash and cash equivalents
  $ 2,268     $ 5,456  
 
Restricted cash
    451       804  
 
Accounts receivable, net of allowance for doubtful accounts of $6 and $205
    924       5,563  
 
Accounts receivable – related party
    2,243        
 
Deferred contract costs
    1,568       1,632  
 
Inventory, prepaid expenses and other assets
    5,429       10,223  
 
Property and equipment, net
    4,106        
 
Goodwill
    37,253        
 
Other intangible assets, net
    12,074        
 
Other assets
    1,969        
 
 Current assets of discontinued operations
    68,285       23,678  
 
Property and equipment, net
          3,516  
 
Goodwill
          38,899  
 
Other intangible assets, net
          14,604  
 
Other assets
          1,207  
 
Other noncurrent assets of discontinued operations
          58,226  
 
Wireless spectrum licenses included in wireless spectrum licenses held for sale
    12,131       14,934  
 
Total assets of discontinued operations
  $ 80,416     $ 96,838  
 
Accounts payable
  $ 1,730     $ 2,630  
 
Accrued expenses
    5,912       5,999  
 
Deferred revenue
    4,392       5,186  
 
Deferred revenue – related party
    7,942       6,797  
 
Long-term obligations and other current liabilities
    3,149       4,205  
 
Deferred income tax liabilities
    4,992       4,529  
 
Other liabilities
          1,025  
 
Current liabilities of discontinued operations
    28,117       30,371  
 
Deferred income tax liabilities
          743  
 
Other liabilities
          986  
 
Other liabilities
          1,729  
 
Total liabilities of discontinued operations
  $ 28,117     $ 32,100  
 
 
 
9


 
 
The results of operations of our discontinued operations are as follows:
     
Three Months Ended
   
Six Months Ended
 
 
(in thousands)
 
July 3,
2010
   
June 27,
2009
   
July 3,
2010
   
June 27,
2009
 
 
Revenues
  $ 8,843     $ 13,934     $ 20,524     $ 32,082  
 
Revenues – related party
    2,268             9,337        
 
Total revenues
    11,111       13,934       29,861       32,082  
 
Operating expenses:
                               
 
Cost of revenues
    5,864       7,048       11,972       14,969  
 
Cost of revenues – related party
    227             530        
 
Engineering, research and development
    4,515       4,771       9,551       14,549  
 
Sales and marketing
    1,942       2,319       4,859       5,694  
 
General and administrative
    3,080       4,829       6,764       9,054  
 
Asset impairment charges
    297       1,500       2,013       11,369  
 
Restructuring charges
    97       290       958       4,941  
 
Total operating expenses
    16,022       20,757       36,647       60,576  
 
Net gains (losses) on business divestitures
    (4,617 )     (2 )     (4,616 )     51  
 
Loss from operations
    (9,528 )     (6,825 )     (11,402 )     (28,443 )
 
Other income (expense), net
    (39 )     655       (18 )     (258 )
 
Loss before income taxes
    (9,567 )     (6,170 )     (11,420 )     (28,701 )
 
Income tax benefit (provision)
    (10 )     (76 )     (107 )     (232 )
 
Net loss from discontinued operations
    (9,577 )     (6,246 )     (11,527 )     (28,933 )
 
Net loss attributed to noncontrolling interest in subsidiary
    1,671             1,237        
 
Net loss from discontinued operations attributed to NextWave
  $ (7,906 )   $ (6,246 )   $ (10,290 )   $ (28,933 )
 
Principles of Consolidation
 
Our consolidated financial statements include the assets, liabilities and operating results of our wholly-owned subsidiaries as of July 3, 2010 and June 27, 2009, and for the three and six months then ended, respectively. Noncontrolling interest represents the noncontrolling shareholder’s proportionate share of the net equity in our consolidated subsidiary, PacketVideo. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Fiscal Year End
 
We operate on a 52-53 week fiscal year ending on the Saturday nearest to December 31 of the current calendar year or the following calendar year. Normally, each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks. Fiscal year 2010 is a 52-week year ending on January 1, 2011 and fiscal year 2009 is a 53-week year ending on January 2, 2010. The three and six month periods ending on July 3, 2010 and June 27, 2009 include 13 and 26 weeks, respectively.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, income taxes and the valuation of marketable securities, share-based awards, goodwill, wireless spectrum licenses, intangible assets and other long-lived assets. Actual results could differ from those estimates.
 
Revenues, Cost of Revenues and Deferred Contract Costs
 
Our discontinued operations have derived revenues from the following sources:
 
·  
contracts to provide multimedia software products for mobile and home electronic devices and related royalties through our PacketVideo subsidiary; and
 
·  
customer subscriptions for our WiMAX Telecom subsidiary.
 
For software arrangements, or in cases where the software is considered more than incidental and is essential to the functionality of the hardware or the infrastructure products, revenue is recognized pursuant to software revenue recognition and construction-type and production-type contracts accounting guidance.
 
For post launch hosting arrangements, revenue is recognized on a pro rata basis based on the term of the contract.
 
 
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Our revenue arrangements can include multiple deliverables, software or technology license, non-recurring engineering services and post-contract customer support. For these arrangements, we consider the revenue recognition - multiple-element arrangements accounting guidance. Accordingly, we evaluate each deliverable in the arrangement to determine whether it represents a separate unit of accounting. If objective and reliable evidence of fair value exists (“vendor specific objective evidence”) for all units of accounting in the arrangement, revenue is allocated to each unit of accounting or element based on those relative fair values. If vendor specific objective evidence of fair value exists for all undelivered elements, but not for delivered elements, the residual method would be used to allocate the arrangement consideration. If elements cannot be treated as separate units of accounting because vendor specific objective evidence of the undelivered elements does not exist, they are combined into a single unit of accounting and the associated revenue is deferred until all combined elements have been delivered or until there is only one remaining element to be delivered. To date, we have not been able to establish vendor specific objective evidence for any of the elements included in our revenue arrangements, as the software and hardware products or services have not yet been sold separately, nor has a standard price list been established. As a result, once the software or technology is delivered and the only undelivered element is services, the entire non-contingent contract value is recognized ratably over the remaining service period. Costs directly attributable to providing these services are also deferred and amortized over the remaining service period of the respective revenues.
 
Services sold separately are generally billed on a time and materials basis at agreed-upon billing rates, and revenue is recognized as the services are performed.
 
We earn royalty revenues on licensed embedded multimedia products sold by our licensees. Generally, royalties are paid by licensees on a contingent, per unit, or fixed fee usage basis. The licensees generally report and pay the royalty in the quarter subsequent to the period of delivery or usage. We recognize royalty revenues based on royalties reported by licensees. When royalty arrangements also provide for ongoing post-contract customer support that does not meet the criteria to be recognized upon delivery of the software, the royalty is recognized ratably from the date the royalty report is received through the stated remaining term of the post-contract customer support. In limited situations, we have determined that post-contract customer support revenue can be recognized upon delivery of the software because the obligation to provide post-contract customer support is for one year or less, the estimated cost of providing the post-contract customer support during the arrangement is insignificant and unspecified upgrades or enhancements offered for the particular post-contract customer support arrangement historically have been and are expected to continue to be minimal and infrequently provided. In these instances, we have accrued all the estimated costs of providing the services upfront, which to date have been insignificant.
 
If we receive non-refundable advanced payments from licensees that are allocable to future contracts periods or could be creditable against other obligations of the licensee to us, the recognition of the related revenue is deferred until such future periods or until such creditable obligations lapse.
 
In instances where we have noted extended payment terms, revenue is recognized in the period the payment becomes due. If an arrangement includes specified upgrade rights, revenue is deferred until the specified upgrade has been delivered.
 
We do not generally allow for product returns and we have no history of significant product returns. Accordingly, no allowance for returns has been provided.
 
The timing and amount of revenue recognition depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves judgments and estimates that our management believes are reasonable.
 
Income Taxes
 
We recognize income tax benefits (expense) based on estimates of our consolidated taxable income (loss) taking into account the various legal entities through which, and jurisdictions in which, we operate. As such, income tax benefits (expense) may vary from the customary relationship between income tax benefit (expense) and income (loss) before taxes.
 
 
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Recent Accounting Pronouncements
 
In October 2009, the FASB issued an Accounting Standards Update (“ASU”) for revenue recognition related to multiple-deliverable revenue arrangements. This ASU provides amendments to the existing criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable, eliminate the residual method of allocation of arrangement consideration to all deliverables and require the use of the relative selling price method in allocation of arrangement consideration to all deliverables, require the determination of the best estimate of a selling price in a consistent manner, and significantly expand the disclosures related to the multiple-deliverable revenue arrangements. The amendments are effective for our fiscal year 2011 with early adoption permitted. We are currently evaluating the impact of adopting these amendments on our consolidated financial statements.
 
In October 2009, the FASB issued an ASU for software revenue recognition. This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance. This amendment is effective for our fiscal year 2011 with early adoption permitted. We are currently evaluating the impact of adopting this amendment on our consolidated financial statements.
 

 
2.  
 Wireless Spectrum Licenses
 
We continue to market for sale our wireless spectrum holdings. Any sale or transfer of the ownership of our wireless spectrum holdings is generally subject to regulatory approval. We are required to use the net proceeds from the sale of our wireless spectrum licenses to redeem our Senior Notes, Second Lien Notes and Third Lien Notes, subject to our right to retain up to $12.5 million of such proceeds after payment of certain Senior Notes for general working capital purposes and permitted investments.
 
During the three and six months ended July 3, 2010, we recognized net gains (losses) on sales of our spectrum licenses of $(0.2) million and $12,000, respectively, after deducting incremental costs of $0.5 million and $0.7 million, respectively.  The net gains (losses) recognized during the three and six months ended July 3, 2010, were partially reduced by lease payments received by us, pending completion of the sale of certain of our owned WCS spectrum licenses in the United States to a third party, of $0.3 million and the forfeiture of a spectrum license sales deposit received by us of $0.3 million. The net loss recognized during the three months ended July 3, 2010, includes incremental costs incurred on wireless spectrum sales anticipated to close during the third quarter of 2010.
 
During the three and six months ended June 27, 2009, we completed sales of certain of our owned Advanced Wireless Services (“AWS”) spectrum licenses in the United States to third parties for net proceeds, after deducting direct and incremental selling costs, of $3.7 million and $5.5 million, and recognized net gains on the sales of $0.7 million and $0.7 million, respectively. The net proceeds from the sales were used to redeem a portion of the Senior Notes at a redemption price of 105% of the principal amount thereof plus accrued interest.
 
We anticipate that certain of our remaining wireless spectrum licenses will be sold within the next twelve months. Accordingly, at July 3, 2010, we classified wireless spectrum holdings with a carrying value of $59.0 million as assets held for sale, and, in accordance with accounting guidance for assets while held for sale, we are no longer amortizing these assets. As of July 3, 2010, the aggregate net carrying value of our remaining wireless spectrum license assets that are not considered held for sale was $405.3 million, which includes $79.1 million of asset value allocated as a result of related deferred tax liabilities determined in accordance with accounting guidance for acquired temporary differences in certain purchase transactions that are not accounted for as business combinations.
 
Through our continued efforts to sell our wireless spectrum licenses in Europe and Argentina during 2010, we determined that the carrying value of certain of these spectrum licenses exceeded their fair value based primarily on bids received and negotiations with third parties regarding the sale of these licenses, which led to our decision not to pursue build out obligations in Europe during this time period. Accordingly, during the six months ended July 3, 2010, we wrote-down the carrying value of our wireless spectrum licenses in Europe and Argentina to their estimated fair value and recognized asset impairment charges of $0.2 million and $0.3 million, respectively, all of which is reported in discontinued operations. Upon the sale and deconsolidation during the three months ended July 3, 2010, of our Slovakia based subsidiary, WiMax Telecom SRO, we reclassified $1.2 million of the asset impairment charge on our
 
 
 
12

 
wireless spectrum licenses in Slovakia that was recognized during the first quarter of 2010 against the net losses on business divestitures.
 
During the six months ended June 27, 2009, we determined that the carrying value of our remaining domestic AWS spectrum licenses and our wireless spectrum licenses in Europe exceeded their fair value based primarily on bids received and negotiations with third parties regarding the sale of these licenses which occurred in April 2009. Accordingly, during the six months ended June 27, 2009, we wrote-down the carrying value of our domestic AWS spectrum licenses and our wireless spectrum licenses in Europe to their estimated fair value and recognized asset impairment charges of $16.2 million, of which $9.4 million is reported in continuing operations and $6.8 million is reported in discontinued operations.
 
 
3.  
Asset Impairment Charges
 
Long-Lived Assets
 
In connection with our ongoing discussions to sell our Nevada office building, we determined that indicators of impairment were present, and, accordingly, based on the accounting guidance for the impairment or disposal of long-lived assets, we performed an assessment to determine if the carrying value of our building was recoverable through estimated undiscounted future cash flows resulting from the use of the assets and their eventual disposition.  During the three and six months ended July 3, 2010, we recognized additional asset impairment charges of $1.5 million, all of which is reported as asset impairment charges in discontinued operations.
 
In connection with our global restructuring initiative, we reviewed our long-lived assets for impairment and, during the six months ended June 27, 2009, determined that indicators of impairment were present for certain long-lived assets. Accordingly, we performed an assessment to determine if the carrying value of these long-lived assets was recoverable through estimated undiscounted future cash flows resulting from the use of the assets and their eventual disposition.  As a result of this assessment, during the three and six months ended June 27, 2009, we recognized additional asset impairment charges of $1.6 million and $4.8 million, of which $1.5 million and $4.6 million is reported as asset impairment charges in discontinued operations and $0.1 million and $0.2 million is reported as asset impairment charges in continuing operations, respectively.
 
There are inherent estimates and assumptions underlying the projected cash flows utilized in the recoverability assessment and management’s judgment is required in the application of this information to the determination of the recovery value of the assets. No assurance can be given that the underlying estimates and assumptions will materialize as anticipated.
 
 
4.  
Restructuring Charges
 
The following summarizes the restructuring activity for the six months ended July 3, 2010 and June 27, 2009 and the related restructuring liabilities:
 
(in thousands)
 
Balance at Beginning of Year
   
Charges to Expense
   
Cash Payments
   
Reversal of Deferred Charges
   
Balance at End of Period
 
 
For the Six Months Ended July 3, 2010
                             
 
Lease abandonment and facility closure costs
  $ 1,750     $ 108     $     $     $ 1,858  
 
Other related costs, including contract termination costs, selling costs and legal fees
    349       1,087       (1,163 )           273  
 
Total
  $ 2,099     $ 1,195     $ (1,163 )   $     $ 2,131  
 
Continuing operations(1)
  $ 1,833     $ 237                     $ 1,697  
 
Discontinued operations
    266       958                       434  
 
Total
  $ 2,099     $ 1,195                     $ 2,131  
 
For the Six Months Ended June 27, 2009
                                       
 
Employee termination costs
  $ 237     $ 4,884     $ (5,085 )   $     $ 36  
 
Lease abandonment and facility closure costs
    1,616       282       (1,173 )     1,136       1,861  
 
Other related costs, including contract termination costs, selling costs and legal fees
    2,668       1,813       (2,286 )           2,195  
 
Total
  $ 4,521     $ 6,979     $ (8,544 )   $ 1,136     $ 4,092  
 
Continuing operations(2)
  $ 3,492     $ 2,038                     $ 3,789  
 
Discontinued operations
    1,029       4,941                       303  
 
Total
  $ 4,521     $ 6,979                     $ 4,092  
 
 
 
(1)  
Included in restructuring charges of continuing operations for the six months ended July 2, 2010 is $0.2 million of interest accretion expense on long-term obligations resulting from the renegotiation of one of our abandoned lease liabilities, which is reported in interest expense of continuing operations in the consolidated statement of operations.
(2)  
Included in the restructuring charges of continuing operations for the three and six months June 27, 2009 is a credit of $1.0 million and net charges of $0.4 million of lease abandonment and facility closure costs related to certain shared facilities. The credit during the three months ended June 27, 2009 resulted from a reduction in our lease obligation pursuant to a sublease termination agreement that was consummated in June 2009. Also included in the restructuring charges of continuing operations for the three and six months ended June 27, 2009 are costs related to the divestiture and closure of discontinued businesses totaling $0.2 million and $1.3 million, respectively.
 
 

 
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5.  
Long-Term Obligations
 
Long-term obligations held by continuing operations consist of the following:
 
(dollars in thousands)
 
July 3,
2010
   
January 2,
2010
 
15% Senior Secured Notes due July 2011, net of unamortized discounts of $6,917 and $6,177 at July 3, 2010 and January 2, 2010, respectively, and stated interest rates of 15% and 14% for payment-in-kind interest at July 3, 2010 and January 2, 2010, respectively, and 9% for cash interest at January 2, 2010
  $ 203,430     $ 162,076  
 
15% Senior-Subordinated Secured Second Lien Notes due November 2011, net of unamortized discounts of $12,038 and $13,182 at July 3, 2010 and January 2, 2010, respectively, and stated interest rates of 15% and 14% at July 3, 2010 and January 2, 2010, respectively
    143,012       127,573  
 
12% Third Lien Subordinated Secured Convertible Notes due December 2011, net of unamortized discounts of $144,670 and $134,230 at July 3, 2010 and January 2, 2010, respectively and stated interest rates of 12% and 7.5% at July 3, 2010 and January 2, 2010, respectively
    420,250       389,869  
 
Wireless spectrum leases, net of unamortized discounts of $15,386 and $16,556 at July 3, 2010 and January 2, 2010, respectively; expiring from 2011 through 2036 with one to five renewal options ranging from 10 to 15 years each
    23,093       25,768  
 
Collateralized non-recourse bank loan with interest at 30-day LIBOR plus 0.25%; principal and interest due upon sale of auction rate securities; secured by auction rate securities
          21,406  
 
Other
    1,631       1,412  
 
Long-term obligations
    791,416       728,104  
 
Less current portion
    (62,134 )     (86,154 )
 
Long-term portion
  $ 729,282     $ 641,950  
 
Effective as of March 16, 2010, we entered into the Amendment and Waiver (Note 1) to the agreements governing our Senior Notes, Second Lien Notes and Third Lien Notes.  Pursuant to the Amendment and Waiver, the maturity date of our Senior Notes was extended from July 17, 2010 to July 17, 2011, with an additional extension to October 17, 2011 if certain conditions are met, including the pendency of asset sales that would yield net proceeds sufficient to repay all then-outstanding Senior Notes.  In addition, the maturity date of our Second Lien Notes was extended from December 31, 2010 to November 30, 2011.  As a result of the Amendment and Waiver, the interest payable on our Senior Notes and Second Lien Notes was increased to a rate of 15% per annum beginning March 16, 2010 and the interest payable on our Third Lien Notes was increased to a rate of 12% per annum beginning March 16,
 
 
 
14

 
2010, increasing 1% per annum on each of December 31, 2010, March 30, 2011, June 30, 2011 and September 30, 2011 to a maximum of 16%.  After giving effect to the Amendment and Waiver, all Notes will receive only payment-in-kind interest for the full term of such Notes, unless we elect to pay cash interest, and the redemption premium on the Notes was eliminated. As a result of the Amendment and Waiver, we classified $59.0 million of the long term obligations as current obligations based on our estimated repayment obligation upon the sale of our Held For Sale assets as required by the Senior Notes, Second Lien Notes, and Third Lien Notes. The Amendment and Waiver reduced the requirement to maintain a minimum cash balance from $5.0 million to $1.0 million and, after payment in full of certain designated Senior Notes (the “Priority Notes”) with an aggregate principal amount of $56.5 million at July 3, 2010 and the Senior Incremental Notes (as defined below) with an aggregate principal amount of $25.5 million at July 3, 2010, permits us to retain up to $12.5 million of asset sale proceeds for general working capital purposes and permitted investments. The Amendment and Waiver also eliminates the redemption premium on all Notes.  As consideration for the Amendment and Waiver, we paid an amendment fee to each Holder through the issuance of additional Notes (the “Fee Notes”) under the applicable Note Agreements in an amount equal to 2.5% of the outstanding principal and accrued and unpaid interest on such Holder’s existing Notes as of March 16, 2010. The Fee Notes were paid on March 16, 2010 through the issuance of $4.3 million in Senior Notes, $3.6 million in Second Lien Notes and $13.3 million in Third Lien Notes.
 
As permitted by the Amendment and Waiver, we issued $20.0 million and $5.0 million in additional Senior Notes (the “Senior Incremental Notes”) during the second quarter of 2010 to Avenue Capital Management II, L.P., acting on behalf of its managed investment funds signatory thereto, and Solus Core Opportunities Master Fund Ltd and its affiliates and co-investors, respectively. As with the other Senior Notes, amounts outstanding under the Senior Incremental Notes bear interest at a rate of 15% per annum, payable in-kind unless we elect to pay cash, and are be secured by a first lien on the same assets securing our Senior Notes, on a pari passu basis. No commitment fee or structuring fee was payable in connection with the issuance of the Senior Incremental Notes.
 
We determined that the Senior Note and Second Lien Note debt instruments prior to and after the March 16, 2010 Amendment and Waiver are not substantially different and, therefore, do not receive debt extinguishment accounting treatment in accordance with generally accepted accounting principles. Under modification accounting, new effective interest rates are determined as of the modification date based on the carrying amount of the original debt instrument and the revised cash flows.  The Fee Notes and the fair value of any new embedded derivatives are considered to be associated with the modified debt instruments and, along with existing unamortized discounts, are amortized as an adjustment to interest expense over the remaining term of the modified debt instruments using the effective interest method.
 
The automatic extension of the maturity date of our Senior Notes from July 17, 2011 to October 17, 2011 if certain conditions are met, including the pendency of asset sales that would yield net proceeds sufficient to repay all then-outstanding Senior Notes, constitutes an embedded derivative. Accordingly, we have bifurcated the estimated fair value of the embedded derivative from the carrying value of the Senior Notes upon modification and recognized subsequent changes in the fair value of the embedded derivative against income. We measured the estimated fair value of the Senior Notes embedded derivative using a probability-weighted discounted cash flow model, which includes management assumptions of the probability of occurrence of certain conditions, including the pendency of asset sales that would yield net proceeds sufficient to repay all then-outstanding Senior Notes. The initial estimated fair value of the Senior Notes embedded derivative at March 16, 2010 of $0.2 million was recorded as a decrease in the carrying value of the Senior Notes and the estimated fair value of the embedded derivative of $0.1 million at July 3, 2010 is reported in other long-term liabilities in the accompanying consolidated balance sheets. The changes in the estimated fair value of the embedded derivative of $0.1 million and $(0.1) million during the three and six months ended July 3, 2010, were recognized as credits (charges) to other income (expense) in the accompanying consolidated statements of operations.
 
The requirements to redeem the Second Lien Notes upon an asset sale and a change in control constitute embedded derivatives. Accordingly, we have bifurcated the estimated fair value of each embedded derivative from the carrying value of the Second Lien Notes and recognized subsequent changes in the fair value of the embedded derivatives against income. We measured the estimated fair value of the Second Lien Notes embedded derivatives using a probability-weighted discounted cash flow model, which
 
 
 
15

 
includes management assumptions of the probability of occurrence of a redemption of the Second Lien Notes upon an asset sale and a change in control. The estimated fair value of the Second Lien Notes embedded derivatives of $0.1 million and $9.9 million at July 3, 2010 and January 2, 2010, respectively, are reported in other long-term liabilities in the accompanying consolidated balance sheets. Changes in the estimated fair value of the embedded derivatives of $0.1 million and $9.8 million during the three and six months ended July 3, 2010, respectively, were recognized as credits to other income (expense) in the accompanying consolidated statements of operations. The reduction in the fair value of the embedded derivative liabilities and the $9.8 million credit to other income (expense) during the six months ended July 3, 2010 resulted primarily from the Amendment and Waiver which eliminated the redemption premiums required upon an asset sale or change in control.
 
The Amendment and Waiver to our Third Lien Notes, which increased the interest rate payable on our Third Lien Notes, was determined to have been accomplished with debt instruments that are substantially different, in accordance with generally accepted accounting principles, resulting in an effective extinguishment of the existing Third Lien Notes and a new issue of Third Lien Notes as of the modification date for accounting purposes.  The new issue of Third Lien Notes was recorded at its estimated fair value using a discount rate of 40%, which represents the estimated incremental borrowing rate of our Third Lien Notes that was determined by a third party valuation group, and that amount was used to determine a net debt extinguishment gain of $38.0 million that was recognized during the six months ended July 3, 2010 in other income in the accompanying consolidated statements of operations. The net gain of $38.0 million was determined as the difference between the remaining unamortized discount under the extinguished Third Lien Notes of $123.1 million and the new discount of $164.8 million, plus $9.6 million of embedded derivative liabilities that were eliminated at the date of the extinguishment, partially offset by $13.3 million in fee notes issued to the Third Lien noteholders.  The new discount of $164.8 million is amortized using the effective interest rate method over the remaining term of the Third Lien Notes due December 2011 which will significantly increase our interest expense for financial reporting purposes.
 
The requirements to redeem the Third Lien Notes upon an asset sale and a change in control constitute embedded derivatives. Accordingly, we have bifurcated the estimated fair value of each embedded derivative from the fair value of the Third Lien Notes upon the effective reissuance of the Third Lien Notes at March 16, 2010, and recognized subsequent changes in the fair value of the embedded derivatives against income. We measured the estimated fair value of the Third Lien Notes embedded derivatives using a probability-weighted discounted cash flow model, which includes management assumptions of the probability of occurrence of a redemption of the Third Lien Notes upon an asset sale and a change in control. The initial estimated fair value of the Third Lien Notes embedded derivatives of $3.7 million was recorded as a reduction in the carrying value of the Third Lien Notes and the estimated fair values of the embedded derivatives of $5.5 million at July 3, 2010, are reported in other long-term liabilities in the accompanying consolidated balance sheets. Changes in the estimated fair value of the embedded derivatives of $(1.7) million and $4.1 million during the three and six months ended July 3, 2010, respectively, were recognized as credits (charges) to other income (expense) in the accompanying consolidated statements of operations.
 
During the three months ended July 3, 2010, we exercised our auction rate securities rights and sold our auction rate securities to UBS for $25.0 million and paid in full our collateralized non-recourse bank loan that was secured by our auction rate securities.

 
 
6.  
Related Party Transactions
 
Debt-Related Transactions
 
As permitted by the March 16, 2010 Amendment and Waiver, we issued $25.0 million in Senior Incremental Notes during the three months ended July 3, 2010 to Avenue Capital Management II, L.P., acting on behalf of its managed investment funds signatory thereto, and Solus Core Opportunities Master Fund Ltd and its affiliates and co-investors.  Avenue Capital Management II, L.P., is an affiliate of Avenue Capital. Robert Symington, a portfolio manager with Avenue Capital, is a member of our Board of Directors. As of July 3, 2010, Avenue Capital and its affiliates beneficially owned shares representing 28.5% of our
 
 
 
16

 
issued and outstanding common stock, $116.8 million, or 56% of the aggregate principal amount of our Senior Notes, $120.7 million, or 78% of the aggregate principal amount of our Second Lien Notes and $159.1 million, or 28% of the aggregate principal amount of our Third Lien Notes. As of July 3, 2010, Solus beneficially owned shares representing 10.0% of our issued and outstanding common stock, $37.0 million, or 18% of the aggregate principal amount of our Senior Lien Notes, $34.3 million, or 22% of the aggregate principal amount of our Second Lien Notes and $65.2 million, or 12% of the aggregate principal amount of our Third Lien Notes.  As with the other Senior Notes, amounts outstanding under the Senior Incremental Notes bear interest at a rate of 15% per annum, payable in-kind unless we elect to pay cash, and will be secured by a first lien on the same assets securing our Senior Notes, on a pari passu basis.   No commitment fee or structuring fee is payable in connection with the issuance of the Senior Incremental Notes. During the three months ended July 3, 2010, we received cash of $20.0 million and $5.0 million and issued Senior Incremental Notes in the same principal amount to Avenue Capital and Solus, respectively.
 
As consideration for the Amendment and Waiver, we paid an amendment fee to each of Avenue, Solus, Douglas F. Manchester, a member of our Board of Directors and Navation, Inc. (“Navation”), an entity owned by Allen Salmasi, our Chairman, through the issuance of additional Notes under the applicable Note Agreements in an amount equal to 2.5% of the outstanding principal and accrued and unpaid interest on such holder’s existing Notes as of March 16, 2010.  The Fee Notes were paid on March 16, 2010 by the issuance of Senior Notes, Second Lien Notes and Third Lien Notes to Avenue Capital, Solus, Mr. Manchester and Navation, and will accrue interest and become payable in accordance with the terms of the respective Note Agreements.  Avenue Capital received $2.3 million in Senior Notes, $2.8 million in Second Lien Notes and $3.7 million in Third Lien Notes.  Solus received $0.7 million in Senior Notes, $0.8 million in Second Lien Notes and $1.5 million in Third Lien Notes.  Mr. Manchester and Navation each received $1.9 million in Third Lien Notes.  The transactions contemplated by the Amendment and Waiver, including the issuance of the Senior Incremental Notes, were approved and recommended to our Board of Directors by an independent committee consisting of members of the Board of Directors who do not have any direct or indirect economic interest in the Notes.
 
Business Divestiture and Revenue Transactions
 
In June 2010, we sold the capital stock of our WiMAX Telecom Slovakia s.r.o (“WT SRO”) subsidiary to flyhigh Partners s. r. o. (“flyhigh”), a private limited liability company of which the controlling shareholder is the former managing director and statutory representative of WT SRO, for $0.1 million and recognized a $8.8 million net loss from business divestitures. Upon closing of the sale, we have no remaining obligations to provide financing to support the ongoing operations of WT SRO. Also, in connection with the sale, we entered into an additional consideration agreement with flyhigh that provides for payment to us upon the occurrence of specified trigger events, which includes the sale, lease or contribution or other transfer of all or part of the assets or capital stock of WT SRO, including a spectrum license to third parties, other than the sale or lease of spectrum assignments of less than 10% to the MHz-pop of WT SRO in the aggregate, or a sale or other transfer of WT SRO share capital to any third party or sale or other transfer of share capital above 34% in flyghigh to any third party.
 
In June 2010, we sold the capital stock of our two Chilean subsidiaries, Southam Chile SA and Socidad Televisora CBC Ltd, to VTR GlobalCom S.A. and VTR Ingenieria S.A., the holders of our notes payable secured by the Chilean spectrum, for net proceeds of $0.7 million, after deducting direct and incremental costs of $0.5 million, and the assumption of the notes payable aggregating $4.3 million.  We recognized a net gain on business divestitures of $4.2 million due to the assumption of our notes payable.
 
DOCOMO, a customer of PacketVideo, hold a 35% ownership interest in our PacketVideo subsidiary.  On July 30, 2010 we signed a stock purchase agreement to sell our remaining 65% ownership interest in PacketVideo to DOCOMO (see Note 12). PacketVideo sells a version of its multimedia player to DOCOMO for installation into DOCOMO handset models.  PacketVideo recognized $2.3 million and $9.3 million in related party revenues and $0.2 million and $0.5 million in cost of revenues, during the three and six months ended July 3, 2010, respectively, from DOCOMO in the consolidated statements of operations for our discontinued operations.
 

 
7.  
Comprehensive Loss
 
Comprehensive loss and comprehensive loss attributable to the noncontrolling interest in subsidiary and NextWave are as follows:
 
 
 
17

 
 
     
Three Months Ended
   
Six Months Ended
 
 
(in thousands)
 
July 3,
2010
   
June 27,
2009
   
July 3,
2010
   
June 27,
2009
 
 
Net loss
  $ (72,853 )   $ (55,487 )   $ (75,769 )   $ (137,666 )
 
Foreign currency translation adjustment
    2,714       4,772       2,421       879  
 
Total comprehensive loss
    (70,139 )     (50,715 )     (73,348 )     (136,787 )
 
Comprehensive loss attributable to noncontrolling interest in subsidiary
    2,213             2,202        
 
Comprehensive loss attributable to NextWave
  $ (67,926 )   $ (50,715 )   $ (71,146 )   $ (136,787 )

 
8.  
Net Loss Per Common Share Information
 
Basic and diluted net loss per common share for the three and six months ended July 3, 2010 and June 27, 2009 is computed by dividing net loss applicable to common shares by the weighted average number of common shares outstanding during the respective periods, without consideration of common stock equivalents.  Our weighted average number of common shares outstanding includes the weighted average number of 1.8 million for warrants exercisable for shares of our common stock that were outstanding during the three and six months ended July 3, 2010, and 7.2 million and 6.6 million during the three and six months ended June 27, 2009, respectively, as they are issuable for an exercise price of $0.07 each. At July 3, 2010, 1.8 million of these warrants remained outstanding.
 
The following securities that could potentially dilute earnings per share in the future are not included in the determination of diluted loss per share as they are antidilutive. The share amounts are determined using a weighted average of the common stock equivalents outstanding during the respective periods.
   
Three Months Ended
Six Months Ended
 
(in thousands)
July 3,
2010
June 27,
2009
July 3,
2010
June 27,
2009
 
Third Lien Notes
7,100
6,404
6,940
6,345
 
Outstanding stock options
2,829
2,125
2,897
2,204

 
9.  
Stockholders’ Deficit
 
Changes in shares of common stock, stockholders’ deficit attributable to NextWave, the noncontrolling interest in subsidiary and total stockholders’ deficit for the six months ended July 3, 2010 are as follows:
 
 (in thousands)
 
Shares of Common Stock
   
Stockholders’ Deficit
Attributable to NextWave
   
Noncontrolling Interest in Subsidiary
   
Total Stockholders’ Deficit
 
 
Balance at January 2, 2010
    22,434     $ (291,605 )   $ 15,948     $ (275,657 )
 
Shares issued for stock options exercised
    60       141             141  
 
Share-based compensation expense
          2,059       763       2,822  
 
Foreign currency translation adjustment
          3,386       (965 )     2,421  
 
Net loss
          (74,532 )     (1,237 )     (75,769 )
 
Balance at July 3, 2010
    22,494     $ (360,551 )   $ 14,509     $ (346,042 )

 
10.  
Fair Value Measurements
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
The following table summarizes our assets and liabilities that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy contained in fair value measurements and disclosures accounting guidance:

 
18

 

 

           
Fair Value Measurements at End of Period Using:
 
 
 
(in thousands)
 
Fair Value
   
Quoted Market Prices for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
 
At July 3, 2010
                       
 
Cash and cash equivalents
  $ 33,844     $ 33,844     $     $  
 
Embedded derivatives(1)
    5,706                   5,706  
 
At January 2, 2010
                               
 
Cash and cash equivalents
  $ 20,512     $ 20,512     $     $  
 
Auction rate securities(2)
    24,023                   24,023  
 
Auction rate securities rights(3)
    1,227                   1,227  
 
Embedded derivatives(1)
    19,504                   19,504  

(1)  
Included in other current and other long-term liabilities in the accompanying consolidated balance sheet
(2)  
Included in restricted cash and marketable securities in the accompanying consolidated balance sheet.
(3)  
Included in other noncurrent assets in the accompanying consolidated balance sheet.

 
Embedded Derivatives. The automatic extension of the maturity date of our Senior Notes from July 17, 2011 to October 17, 2011 if certain conditions are met, including the pendency of asset sales that would yield net proceeds sufficient to repay all then-outstanding Senior Notes, and our obligation to redeem the Second Lien Notes and Third Lien Notes upon an asset sale and a change in control constitute embedded derivatives under derivatives and hedging accounting guidance. Accordingly, we have bifurcated the estimated fair value of each embedded derivative from the carrying values of the Senior Notes, Second Lien Notes and Third Lien Notes and recognized subsequent changes in the fair value of the embedded derivatives in the income statement. We measured the estimated fair value of the Senior Notes, Second Lien Notes and Third Lien Notes embedded derivatives using probability-weighted discounted cash flow models (Level 3 inputs). The discounted cash flow models utilize management assumptions of the probability of occurrence of an additional extension of the maturity date of our Senior Notes and a redemption of the Second Lien Notes and Third Lien Notes upon an asset sale and a change in control.
 
 
Auction Rate Securities. At January 2, 2010, we estimated the fair value of our auction rate securities, which were classified as trading securities under debt and equity securities accounting guidance, using a discounted cash flow model (Level 3 inputs), which measures fair value based on the present value of projected cash flows over a specific period. The values are then discounted to reflect the degree of risk inherent in the security and achieving the projected cash flows. The discounted cash flow model used to determine the fair value of the auction rate securities at January 2, 2010 utilized a discount rates of 2.5% which represent estimated market rates of return, and estimated periods until sale and/or successful auction of the security of one year. The determination of the fair value of our auction rate securities also considered, among other things, the collateralization underlying the individual securities and the creditworthiness of the counterparty. During the three months ended July 3, 2010, we exercised our auction rate securities rights and sold our auction rate securities to UBS for $24.0 million and paid in full our collateralized non-recourse bank loan that was secured by our auction rate securities.
 
 
Auction Rate Securities Rights. Our auction rate securities rights allowed us to sell our auction rate securities at par value to UBS at any time during the period of June 30, 2010 through July 2, 2012, and during the three months ended July 2, 2010, we exercised these rights and sold our auction rate securities to UBS. We elected to measure the fair value of the auction rate securities rights under financial instruments accounting guidance, which we believe will mitigated volatility in our reported earnings due to the inverse relationship between the fair value of the auction rate securities rights and the underlying auction rate securities. At January 2, 2010, we estimated the fair value of our auction rate securities rights using a discounted cash flow model, similar to the auction rate securities (Level 3 inputs). The discounted cash flow model at January 2, 2010 utilized a discount rate of 1.0% and an estimated period until recovery of less than one year.
 
 
The following table summarizes the activity in assets (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3 Inputs – see chart below):
 
 
19

 
                 
Embedded Derivatives
       
 
(in thousands)
 
 
Auction Rate Securities
   
Auction Rate Securities Rights
   
Senior
Notes
   
Second Lien Notes
   
Third Lien
Notes
   
Total
 
 
Balance at January 2, 2010
  $ 24,023     $ 1,227     $     $ (9,928 )   $ (9,576 )   $ 5,746  
 
Purchases, issuances, sales, exchanges, settlements and debt modifications
    (24,023 )     (1,227 )     (182 )     (41 )     5,929       (19,544 )
 
Realized gains included in other income (expense), net
                      9,554             9,554  
 
Unrealized gains (losses) included in other income (expense), net
                65       288       (1,815 )     (1,462 )
 
Balance at July 3, 2010
  $     $     $ (117 )   $ (127 )   $ (5,462 )   $ 5,706  
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
The following table summarizes our assets and liabilities that were measured at fair value on a nonrecurring basis during the period and their respective input levels based on the fair value hierarchy contained in fair value measurements and disclosures accounting guidance:
           
Fair Value Measurements Using:
   
Fair Value Measurements Recorded During the:
 
 
 
(in thousands)
 
Net Carrying Value at End of Period
   
Quoted Market Prices for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
   
Three
Months Ended
   
Six
Months Ended
 
 
July 3, 2010
                                   
 
Wireless spectrum licenses held for sale(1)
  $ 59,048     $     $ 59,048     $     $ (1,177 )   $ 538  
 
Property and equipment, net(2)
    11,427                   11,427       1,500       1,500  
 
June 27, 2009
                                               
 
Wireless spectrum licenses held for sale
  $ 113,063     $     $ 113,063     $     $     $ 16,171  
 
Property and equipment, net(3)
    17,693                   17,693       1,583       4,257  

(1)  
Upon the sale and deconsolidation during the three months ended July 3, 2010, of our Slovakia based subsidiary, WiMax Telecom SRO, we reclassified $1.2 million of the asset impairment charge on our wireless spectrum licenses in Slovakia that was recognized during the first quarter of 2010 against the net losses on business divestitures in discontinued operations.
(2)  
Includes property and equipment of continuing operations of $3.8 million, property and equipment of discontinued operations of $4.1 million and property and equipment held for sale by discontinued operations of $3.5 million
(3)  
Includes property and equipment of continuing operations of $0.7 million, property and equipment of discontinued operations of $12.0 million and property and equipment held for sale by discontinued operations of $5.0 million.
 
Wireless Spectrum Licenses. Through our continued efforts to sell our remaining domestic AWS spectrum licenses and our wireless spectrum licenses in Europe and Argentina, we determined that the carrying value of these spectrum licenses exceeded their fair value based primarily on bids received and negotiations with third parties regarding the sale of these licenses. We estimated the fair value of these wireless spectrum licenses based on advanced negotiations and submitted bids from third parties for the purchase of the licenses (Level 2 Inputs). Accordingly, during the three and six months ended July 3, 2010, we wrote-down the carrying value of our wireless spectrum licenses in Europe and Argentina to their estimated fair value and recognized asset impairment charges of $0.2 million and $0.3 million, respectively, all of which is reported in discontinued operations.  During the six months ended June 27, 2009, we wrote-down the carrying value of our domestic AWS spectrum licenses and our wireless spectrum licenses in Europe and Argentina to their estimated fair value and recognized asset impairment charges of $16.2 million, of which $9.4 million is reported in continuing operations and $6.8 million is reported in discontinued operations.
 
Property and Equipment, Net. In connection with our ongoing discussions to sell our Nevada office building, we determined that indicators of impairment were present, and, accordingly, based on the
 
 
 
20

 
accounting guidance for the impairment or disposal of long-lived assets, we performed an assessment to determine if the carrying value of our building was recoverable through estimated undiscounted future cash flows resulting from the use of the assets and their eventual disposition.  During the three and six months ended July 3, 2010, we recognized additional asset impairment charges of $1.5 million, all of which is reported as asset impairment charges in discontinued operations.  In connection with our global restructuring initiative, we continued to review our long-lived assets for impairment and, during the six months ended June 27, 2009, determined that indicators of impairment were present for the long-lived assets in our semiconductor segment as well as certain other long-lived assets. Accordingly, we performed an assessment to determine if the carrying value of these long-lived assets was recoverable through estimated undiscounted future cash flows resulting from the use of the assets and their eventual disposition (Level 3 inputs). Based on the impairment assessment performed, we determined that the carrying value of our property and equipment exceeded its estimated fair value and, accordingly, we recognized asset impairment charges of $1.6 million and $4.3 million during the three and six months ended June 27, 2009, of which $1.5 million and $4.1 million is reported as asset impairment charges in discontinued operations and $0.1 million and $0.2 million is reported as asset impairment charges in continuing operations, respectively.
 
Fair Value of Other Financial Instruments
 
The carrying amounts of certain of our financial instruments of continuing operations, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and note payable to bank, approximate fair value due to their short-term nature. The carrying amounts and fair values of our long-term obligations of continuing operations are as follows:
     
July 3, 2010
   
January 2, 2010
 
 
 
(in thousands)
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
 
Senior Notes
  $ 203,430     $ 201,000     $ 162,076     $ 156,438  
 
Second Lien Notes
    143,012       142,176       127,573       122,070  
 
Third Lien Notes
    420,250       420,251       389,869       347,189  
 
Wireless spectrum leases
    23,093       9,497       25,768       13,345  
 
At July 3, 2010, we determined the fair value of our Senior Notes, Second Lien Notes and leased wireless spectrum licenses using discounted cash flow models with discount rates of 15%, 23% and 40%, respectively, which represents our respective estimated incremental borrowing rates as of that date for that type of instrument.  At July 3, 2010, our Third Lien Notes were measured using their fair value upon reissuance for accounting purposes in March 2010. At January 2, 2010, we determined the fair value of our Notes and wireless spectrum licenses using a discounted cash flow model with a discount rate of 32.5%, which represents our estimated incremental borrowing rate as of that date.
 
11.  
Commitments and Contingencies
 
Legal Proceedings
 
On September 16, 2008, a putative class action lawsuit, captioned “Sandra Lifschitz, On Behalf of Herself and All Others Similarly Situated, Plaintiff, v. NextWave Wireless Inc. et al., Defendants,” was filed in the U.S. District Court for the Southern District of California against us and certain of our officers. The suit alleges that the defendants made false and misleading statements and/or omissions in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The suit seeks unspecified damages, interest, costs, attorneys’ fees, and injunctive, equitable or other relief on behalf of a purported class of purchasers of our common stock during the period from March 30, 2007 to August 7, 2008. A second putative class action lawsuit captioned “Benjamin et al. v. NextWave Wireless Inc. et al.” was filed on October 21, 2008 alleging the same claims on behalf of purchasers of our common stock during an extended class period, from November 27, 2006 through August 7, 2008. On February 24, 2009, the Court issued an Order consolidating the two cases and appointing a lead plaintiff pursuant to the Private Securities Litigation Reform Act. On May 15, 2009, the lead plaintiff filed an Amended Complaint, and on June 29, 2009, we filed a Motion to Dismiss that Amended Complaint. On March 5, 2010, the Court granted our Motion to Dismiss without prejudice, permitting the lead plaintiff to file an Amended Complaint.  On March 26, 2010, the lead plaintiff filed a Second Amended Consolidated Complaint.  On April 30, 2010, NextWave filed a Motion to Dismiss the Second Amended Complaint and the Motion now
 
 
 
21

 
has been fully briefed and is under submission to the court. At this time, there can be no assurance as to the ultimate outcome of this litigation.
 
We are also currently involved in other legal proceedings in the ordinary course of our business operations. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. As of July 3, 2010, other than the matters described above, we have not recorded any significant accruals for contingent liabilities associated with our legal proceedings based on our belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. Revisions to our estimate of the potential liability could materially impact future results of operations.
 
Indemnifications
 
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products. We have also entered into indemnification agreements with our officers and directors. Although the maximum potential amount of future payments we could be required to make under these indemnifications is unlimited, to date we have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. Additionally, we have insurance policies that, in most cases, would limit our exposure and enable us to recover a portion of any amounts paid. Therefore, we believe the estimated fair value of these agreements is minimal and likelihood of incurring an obligation is remote. Accordingly, we have not accrued any liabilities in connection with these indemnification obligations as of July 3, 2010.
 
12.  
Subsequent Event
 
On July 30, 2010, we signed a definitive agreement for the sale of our remaining 65% stock ownership in our PacketVideo subsidiary to DOCOMO and continued to pursue wireless spectrum license sales, the net proceeds of which we will retain $12.5 million for general working capital purposes and permitted investments and the remainder of which will be used to reduce our outstanding indebtedness, thereby reducing interest accruals payable in future years.  In July 2009, DOCOMO acquired a 35% ownership interest in PacketVideo.
 
Upon completion of the Transaction, which is expected during our third quarter of 2010, PacketVideo will become a wholly owned subsidiary of DOCOMO.  The Transaction remains subject to customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and approval by NextWave stockholders. The Stock Purchase Agreement also includes provisions enabling us and/or DOCOMO to terminate the Stock Purchase Agreement in certain specified circumstances. Following a termination of the Stock Purchase Agreement, we may be required to reimburse up to $0.7 million of the aggregate expenses of DOCOMO under specified circumstances.
 
The Transaction likely will not result in any material United States federal or California state corporate income tax liability (including any alternative minimum tax liability) because we anticipate using our net operating losses to offset any taxable gain generated.
 
In connection with the signing of the Stock Purchase Agreement, Dr. James C. Brailean resigned from his position as the Chief Executive Officer, Chief Operating Officer and President of NextWave and as a member of NextWave’s Board of Directors.  Dr. Brailean continues to serve as the President and Chief Executive Officer and as a member of the Board of Directors of PacketVideo.

 
22

 

 
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this Quarterly Report. Additionally, the following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended January 2, 2010 contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2010.
 
 
           We operate on a 52-53 week fiscal year ending on the Saturday nearest to December 31 of the current calendar year or the following calendar year.  Normally, each fiscal year consists of 52 weeks, but every five or six years the fiscal year consists of 53 weeks. Fiscal year 2010 is a 52-week year ending on January 1, 2011 and fiscal year 2009 was a 53-week year ending January 2, 2010. The three and six month periods ending on July 3, 2010 and June 27, 2009 include 13 and 26 weeks, respectively.
 
 
OVERVIEW
 
Second Quarter Highlights
 
·  
Our net loss from continuing operations during the second quarter of 2010 was $63.3 million compared to $49.2 million for the second quarter of 2009.
 
·  
Our net loss from continuing operations during the first six months of 2010 was $64.2 million, and prior to the gain on extinguishment of debt of $38.0 million, was $102.2 million, compared to $108.7 million for the first six months of 2009.
 
·  
As permitted by the Amendment and Limited Waiver (the “Amendment and Waiver”) to the agreements governing our Senior Notes, Second Lien Notes and Third Lien Notes, we issued $20.0 million and $5.0 million in additional Senior Notes (the “Senior Incremental Notes”) to Avenue Capital Management II, L.P., acting on behalf of its managed investment funds signatory thereto (“Avenue”), and Solus Core Opportunities Master Fund Ltd and its affiliates and co-investors (“Solus”), respectively.  As with the other Senior Notes, amounts outstanding under the Senior Incremental Notes bear interest at a rate of 15% per annum, payable in-kind unless we elect to pay cash, and are secured by a first lien on the same assets securing our Senior Notes, on a pari passu basis.   No commitment fee or structuring fee was payable in connection with the issuance of the Senior Incremental Notes.
 
·  
Effective June 21, 2010 we amended our Amended and Restated Certificate of Incorporation to effect a 1-for-7 reverse stock split.  At the effective time of the reverse stock split, every seven shares of our pre-split common stock, with a par value $0.001 per share, was automatically converted into one share of post-split common stock, with a par value $0.007 share.  The number of authorized shares of our common stock was reduced accordingly by a ratio of 1-for-7 from 400 million to 57.1 million shares.  Outstanding stock incentive awards and shares available for future grants were also adjusted to give effect to the reverse split.
 
Subsequent Event
 
·  
On July 30, 2010, we signed a Stock Purchase Agreement to sell our remaining 65% ownership interest in our PacketVideo subsidiary to DOCOMO, a customer of PacketVideo, for approximate net proceeds of $107.0 million, after deducting estimated direct and incremental costs of $4.6 million (the “Transaction”).  Of the net proceeds, we will retain $12.5 million for working capital and permitted investments and redeem approximately $94.5 million in principal and accrued interest on our Senior Notes.  Upon completion of the Transaction, which is expected during our third quarter of 2010, PacketVideo will become a wholly owned subsidiary of DOCOMO.  The Transaction remains subject to customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and approval by NextWave stockholders. The Stock Purchase Agreement also includes provisions enabling us and/or DOCOMO to terminate the Stock Purchase Agreement in certain specified circumstances. Following a termination of the Stock
 
 
 
23


 
 
Purchase Agreement, we may be required to reimburse up to $0.7 million of the aggregate expenses of DOCOMO under specified circumstances. In connection with the signing of the Stock Purchase Agreement, Dr. James C. Brailean resigned from his position as the Chief Executive Officer, Chief Operating Officer and President of NextWave and as a member of NextWave’s Board of Directors.  Dr. Brailean continues to serve as the President and Chief Executive Officer and as a member of the Board of Directors of PacketVideo.
 
Our Business
 
NextWave Wireless Inc. is a holding company for a significant wireless spectrum portfolio. As a result of our global restructuring initiative, our continuing operations are focused on the management of our wireless spectrum interests.
 
Our total domestic spectrum holdings consist of approximately four billion MHz POPs (The term "MHz-POPs" is defined as the product derived from multiplying the number of megahertz associated with a license by the population of the license's service area), covering approximately 215.9 million total POPs, with 106.9 million POPs covered by 20 MHz or more of spectrum, and an additional 90.6 million POPs covered by at least 10 MHz of spectrum. In addition, a number of markets, including much of the New York City metropolitan region, are covered by 30 MHz or more of spectrum. Our domestic spectrum resides in the 2.3 GHz Wireless Communication Services (“WCS”), 2.5 GHz Broadband Radio Service (“BRS”)/Educational Broadband Service (“EBS”), and 1.7/2.1 GHz Advanced Wireless Service (“AWS”) AWS bands and offers propagation and other characteristics suitable to support high-capacity, mobile broadband services.
 
Our international spectrum held for continuing operations include 2.3 GHz licenses in Canada, covering 15 million POPs.
 
We continue to pursue the sale of our wireless spectrum holdings and any sale or transfer of the ownership of our wireless spectrum holdings is subject to regulatory approval. We expect that we will be required to successfully monetize most of our wireless spectrum assets in order to retire our debt.
 
To date, we have realized a positive return on the sale of the majority of our domestic AWS spectrum licenses. However, there can be no assurance that we will realize a similar return upon the sale of our remaining wireless spectrum holdings. The sale price of our wireless spectrum assets will be impacted by, among other things:
 
·  
the FCC’s new technical rules relating to the operation of satellite digital audio radio services and services using our WCS spectrum licenses;
 
·  
the timing and associated costs of build out or substantial service requirements attached to our domestic and international spectrum licenses, where a failure to comply with these requirements could result in license forfeiture;
 
·  
timing of closure of potential sales, in particular if it is necessary to accelerate the planned sale of certain of our spectrum licenses in order to meet debt payment obligations;
 
·  
worldwide economic conditions which we believe have adversely affected manufacturers of telecommunications equipment and technology and led to a delay in global network deployments;
 
·  
availability of wireless spectrum in the United States in particular, which could be affected by potential government auctions of spectrum not previously available in the market; and
 
·  
availability of capital for prospective spectrum buyers, which has been negatively impacted by the downturn in the credit and financial markets.
 
As we have previously disclosed, our efforts to sell our wireless spectrum holdings on favorable terms has been delayed by current market conditions, as well as regulatory and other market activities involving potential buyers. We are continuing to have discussions with numerous parties who have expressed interest in our various spectrum assets. However, we believe that adverse economic conditions
 
 
 
24

 
continue to affect potential purchasers of our wireless spectrum, and there can be no assurance as to the timing of further spectrum sales or the sales prices that will be attained.
 
Discontinued Operations
 
The results of operations of our PacketVideo and Cygnus subsidiaries, and our Global Services and NextWave Network Product Support strategic business units, our Semiconductor segment and our WiMAX Telecom, Inquam and South American businesses, have been reported as discontinued operations in the consolidated financial statements for all periods presented, prior to sale or dissolution of the respective business.
 
Our discontinued international spectrum holdings include nationwide 3.5 GHz licenses in Switzerland; a nationwide 2.0 GHz license in Norway; and 2.5 GHz licenses in Argentina, collectively covering 28 million POPs.
 

 
RESULTS OF OPERATIONS
 
The results of operations of our PacketVideo and Cygnus subsidiaries, and our Global Services and NextWave Network Product Support strategic business units, our Semiconductor segment and our WiMAX Telecom, Inquam and South American businesses, have been reported as discontinued operations in the consolidated financial statements for all periods presented.
 
Comparison of Our Second Quarter of 2010 to Our Second Quarter of 2009 – Continuing Operations
 
General and Administrative
 
General and administrative expenses from continuing operations during the second quarter of 2010 were $8.0 million compared to $11.6 million for the second quarter of 2009.  The $3.6 million decrease is attributable primarily to the cost reductions resulting from the global restructuring initiative we implemented in the second half of 2008, which included reductions in workforce and certain overhead and discretionary costs, and the closure of certain facilities.  The costs incurred in connection with our global restructuring initiative, including compensation related costs incurred related to terminated employees, costs incurred related to vacated leased facilities and other restructuring related costs, are included in restructuring charges.
 
Included in general and administrative expenses during each of the second quarters of 2010 and 2009 is $1.9 million of amortization of finite-lived wireless spectrum. Also included in general and administrative expenses during the second quarters of 2010 and 2009 is $0.3 million and $0.7 million, respectively, of share-based compensation expense
 
Restructuring Charges
 
In connection with the implementation of our global restructuring initiative, during the second quarter of 2009, our corporate support function incurred $0.1 million in employee termination costs and $0.2 million of costs related to the divestiture and closure of discontinued businesses. These costs were more than offset by credits totaling $1.0 million in lease abandonment and related facility closure costs and contract termination costs that resulted from settlements of certain of our leases, software license and maintenance agreements which reduced our payment obligations.
 
Gain (loss) on Sales of Wireless Spectrum Licenses
 
During the second quarter of 2010 we recognized net losses on sales of our wireless spectrum licenses of $0.2 million, after deducting incremental costs of $0.5 million.  These net losses were partially reduced by lease payments received by us, pending completion of the sale of certain of our owned WCS spectrum licenses in the United States to a third party, of $0.3 million and the forfeiture of a spectrum license sales deposit received by us of $0.3 million.
 
During the second quarter of 2009, we completed sales of certain of our owned AWS spectrum licenses in the United States to third parties for net proceeds, after deducting direct and incremental selling costs, of $3.7 million, and recognized a net gain on the sales of $0.7 million. The net proceeds from the
 
 
 
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sales were used to redeem a portion of the Senior Notes at a redemption price of 105% of the principal amount thereof plus accrued interest.
 
Interest Expense
 
Interest expense from continuing operations during the second quarter of 2010 was $54.2 million, as compared to $39.1 million during the second quarter of 2009, an increase of $15.1 million. The increase is primarily attributable to higher principal and paid-in-kind interest and the March 2010 Amendment and Waiver which increased interest rates on our Notes.  Interest expense and interest accretion of the debt discounts and issuance costs related to our Senior Notes, Second Lien Notes and Third Lien Notes accounted for $(1.1) million, $1.1 million and $14.9 million, respectively, of the increase (decrease).
 
Interest expense from continuing operations is expected to increase over the next twelve months due to increased interest rates on our Senior Notes, Second Lien Notes and Third Lien Notes and the higher discount on our Third Lien Notes resulting from the debt extinguishment.  Interest expense will also be affected by the timing and amount of redemptions of our Senior Notes using the proceeds from asset sales and other financial activities.  In addition, the accounting treatment of the maturity extension of our Third Lien Notes has resulted in a discount of $164.8 million which will be amortized using the effective interest rate method over the remaining term of the Third Lien Notes due December 2011, which will significantly increase our recorded interest expense for financial reporting purposes.
 
Other Income and Expense, Net
 
Other expense, net, from continuing operations during the second quarter of 2010 was $1.2 million, as compared to other income, net of $0.2 million during the second quarter of 2009, an increase of $1.4 million. The increase in other expense, net, reflects primarily changes in the estimated fair values of our embedded derivatives on our Senior Notes, Second Lien Notes and Third Lien Notes aggregating $1.3 million.
 
Income Tax Provision
 
During the second quarters of 2010 and 2009, substantially all of our U.S. and foreign subsidiaries in our continuing operations had net losses for tax purposes with full valuation allowances and, therefore, no material income tax provision or benefit was recognized for these subsidiaries.
 

 
Comparison of Our First Six Months of 2010 to Our First Six Months of 2009 – Continuing Operations
 
General and Administrative
 
General and administrative expenses from continuing operations during the first six months of 2010 were $13.9 million compared to $20.7 million for the same period in 2009.  The $6.8 million decrease in general and administrative expenses from continuing operations during the first six months of 2010, as compared to the same period in 2009, is attributable primarily to the cost reductions resulting from the global restructuring initiative we implemented in the second half of 2008, which included reductions in workforce and certain overhead and discretionary costs, and the closure of certain facilities.  The costs incurred in connection with our global restructuring initiative, including compensation related costs incurred related to terminated employees, costs incurred related to vacated leased facilities and other restructuring related costs, are included in restructuring charges.
 
Included in general and administrative expenses during the first six months of 2010 and 2009 is $3.8 million and $3.9 million, respectively, of amortization of finite-lived wireless spectrum licenses. Also included in general and administrative expenses during the first six months of 2010 and 2009 is $0.6 million and $1.2 million, respectively, of share-based compensation expense
 
Asset Impairment Charges
 
Through our continued efforts to sell our remaining domestic AWS spectrum licenses, we determined that the carrying value of these spectrum licenses exceeded their fair value based primarily on bids received and negotiations with third parties regarding the sale of these licenses which occurred in April 2009. Accordingly, during the first six months of 2009, we wrote-down the carrying value of our
 
 
 
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domestic AWS spectrum licenses to their estimated fair value and recognized an asset impairment charge related to continuing operations of $9.4 million.
 
Additionally, during the first six months of 2009, we recognized an asset impairment charge of $0.2 million related to certain long-lived and prepaid assets utilized by our corporate administration functions.
 
Restructuring Charges
 
In connection with the implementation of our global restructuring initiative, during the first six months of 2009, our corporate support function incurred $0.3 million in employee termination costs, $0.4 million in lease abandonment and related facility closure costs and $1.3 million of costs related to the divestiture and closure of discontinued businesses.
 
Gain on Sales of Wireless Spectrum Licenses
 
During the first six months of 2010, we recognized net gains on sales of our wireless spectrum licenses of $12,000, after deducting incremental costs of $0.7 million.  These net losses were partially reduced by lease payments received by us, pending completion of the sale of certain of our owned WCS spectrum licenses in the United States to a third party, of $0.3 million and the forfeiture of a spectrum license sales deposit received by us of $0.3 million.
 
During the first six months of 2009, we completed sales of certain of our owned AWS spectrum licenses in the United States to third parties for net proceeds, after deducting direct and incremental selling costs, of $5.5 million, and recognized a net gain on the sales of $0.7 million. The net proceeds from the sales were used to redeem a portion of the Senior Notes at a redemption price of 105% of the principal amount thereof plus accrued interest.
 
Interest Expense
 
Interest expense from continuing operations during the first six months of 2010 was $98.3 million, compared to $75.9 million during the first six months of 2009, an increase of $22.4 million. The increase is primarily attributable to higher principal and paid-in-kind interest and the Amendment and Waiver which increased interest rates on our Notes.  Interest expense and interest accretion of the debt discounts and issuance costs related to our Senior Notes, Second Lien Notes and Third Lien Notes accounted for $(0.9) million, $3.2 million and $19.9 million, respectively, of the increase (decrease).
 
Gain on Extinguishment of Debt
 
The Amendment and Waiver modification to our Third Lien Notes, which increased the interest rate payable on our Third Lien Notes, was determined to have been accomplished with debt instruments that are substantially different, in accordance with generally accepted accounting principles, resulting in an effective extinguishment of the existing Third Lien Notes and a new issue of Third Lien Notes as of the modification date for accounting purposes.  The new issue of Third Lien Notes was recorded at its estimated fair value using a discount rate of 40%, and that amount was used to determine net debt extinguishment gain of $38.0 million. The net gain was determined as the difference between the remaining unamortized discount under the extinguished Third Lien Notes of $123.1 million and the new discount of $164.8 million, plus $9.6 million of embedded derivative liabilities that were eliminated at the date of the extinguishment, partially offset by $13.3 million in fee notes issued to the Third Lien noteholders. The new discount of $164.8 million is amortized using the effective interest rate method over the remaining term of the Third Lien Notes due December 2011 which will significantly increase our interest expense for financial reporting purposes.
 
Other Income and Expense, Net
 
Other income, net, from continuing operations during the first six months of 2010 was $9.4 million, as compared to other expense, net of $1.3 million during the first six months of 2009, an increase of $10.7 million. The increase in other income, net, reflects primarily changes in the estimated fair values of our embedded derivatives on our Senior Notes, Second Lien Notes and Third Lien Notes aggregating $9.1 million and cash of $1.0 million released from escrow related to our reorganization in 2005. Of the $9.1 million change in the estimated fair values of our embedded derivative liabilities, $9.6 million of the
 
 
 
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credit to other income (expense) resulted primarily from the Amendment and Waiver which eliminated the Second Lien Note redemption premiums required upon an asset sale or change in control.
 
Income Tax Provision
 
During the first six months of 2010 and 2009 substantially all of our U.S. and foreign subsidiaries in our continuing operations had net losses for tax purposes and, therefore, no material income tax provision or benefit was recognized for these subsidiaries.
 

 
Comparison of Our Second Quarter and First Six Months of 2010 to Our Second Quarter and First Six Months of 2009 – Discontinued Operations
 
The results of operations of our discontinued Multimedia and Semiconductor segments and our WiMAX Telecom, Inquam and South American businesses, which were previously in our Strategic Initiatives segment, are as follows:
 
     
Three Months Ended
   
Six Months Ended
 
 
(in millions)
 
July 3,
2010
   
June 27,
2009
   
Increase (Decrease)
   
July 3,
2010
   
June 27,
2009
   
Increase (Decrease)
 
 
Revenues
  $ 8.8     $ 13.9     $ (5.1 )   $ 20.5     $ 32.1     $ (11.6 )
 
Revenues – related party
    2.3             2.3       9.4             9.4  
 
Total revenues
    11.1       13.9       (2.8 )     29.9       32.1       (2.2 )
 
Operating expenses:
                                               
 
Cost of revenues
    5.9       7.0       (1.1 )     12.0       15.0       (3.0 )
 
Cost of revenues – related party
    0.2             0.2       0.5             0.5  
 
Engineering, research and development
    4.5       4.8       (0.3 )     9.5       14.5       (5.0 )
 
Sales and marketing
    1.9       2.3       (0.4 )     4.9       5.7       (0.8 )
 
General and administrative
    3.1       4.8       (1.7 )     6.8       9.1       (2.3 )
 
Asset impairment charges
    0.3       1.5       (1.2 )     2.0       11.4       (9.4 )
 
Restructuring charges
    0.1       0.3       (0.2 )     0.9       4.9       (4.0 )
 
Total operating expenses
    16.0       20.7       (4.7 )     36.6       60.6       (24.0 )
 
Net gains (losses) on business divestitures
    (5.2 )           (5.2 )     (5.2 )     0.1       (5.3 )
 
Loss from operations
    (10.1 )     (6.8 )     (3.3 )     (11.9 )     (28.4 )     16.5  
 
Other income and (expense), net
    0.5       0.6       (0.1 )     0.5       (0.3 )     0.8  
 
Loss before income taxes
    (9.6 )     (6.2 )     (3.4 )     (11.4 )